Let's Practise: Case Study QualiPro: Developing a financial plan for a startup. quantification of DNA samples in laboratories. This is an a major important step before QualiPro originated as a life science instrumentation spin-off from a university and a research institute specializing in microelectronics in 2006. developed a new medical device, ProSample 16, which enables high-speed fluidic ProPlates, through which 16 micro-volume DNA samples can be pro labs analyze the DNA itself. Its competitive advantage lies in its patented micro cessed and quantified in a fully automated workflow. It is easy to use, and is expected to appeal to large DNA laboratories for whom it should represent a significant decrease in cost and time for preparing DNA samples for analysis. At startup, QualiPro has a laboratory prototype of ProSample 16 ready, and is developing a beta version of the prototype to be tested in a real-life setting The ultimate goal is to develop a complete software toolbox for detailed sample analysis and quantification, which can be integrated in any DNA laboratory workflow. QualiPro is established with capital consisting of 340,000 cash and 200,000 IP rights for the university. The three entrepreneurs received 25 per cent of the shares for their initial commitment. The entrepreneurs' shares carry less rights THE FINANCIAL PLAN: FORECASTING 211 compared to the investors' shares, however, meaning that they will only benefit if the company performs really well. Further, they are expected to work at below- market salaries to compensate for the shares they received at startup. More capital was sought at startup from specialized early-stage venture capi tal investors. They found the project too immature and required further tech- nological development and market testing before investing. It was clear from the outset that considerably more money would be needed. The initial financial plan developed before the startup anticipated that the first products would hit the market in the second semester of 2008, leading to slightly more than half a million euros in revenues in 2008. Given the competitive advantage of the ProSample 16, it was expected that revenues would grow rapidly. In order to get the product on the market, major R&D and marketing spending would be required, totalling more than 2 million from startup to 2009. Nevertheless, it was expected that the company would reach EBITDA break-even in two years time, at the end of 2009. Capital expenditures were mainly limited to laboratory equipment and tools, but were nevertheless expected to reach a 1.5 million spread over the first three years. Major investments amounting to 417,500 were expected shortly after startup to support R&D, and again in 2009 when produc tion of ProSample 16 and of the ProPlates disposables would have to be orga- nized. This leads to an expected negative free cash flow of 3.7 million to cover QualiPro's first three years. Based upon the initial financial plan, a 3.5 million financing round was prepared immediately after startup. Very quickly, however, the entrepreneurs realized that it would be impossible to raise this amount of money, given the early stage of development of the company. Investors expected at least a work- ing proof of concept and ideally one or more letters of intent from major customers before committing significant amounts. Therefore, a new and detailed monthly financial plan was developed, covering September 2007 to: December 2010. It aimed for a lower spending rate, in order to ease the financing of the spin-off. This would inevitably lead to a slower introduction of the first products on the market. The New Plan The revenue budget included sales of the ProSample 16 device from July 2008 onwards, and of a new device. ProSample 96, starting from January 2009. The sales budget was based on both a bottom-up and top-down analysis of the market. ProSample 16 would be sold for 10,000, and ProSample 96 for 20,000. In addition to the revenues generated by selling the devices, it was expected that selling the disposable ProPlates would lead to a strong recurring income stream. A ProPlates could only be used once; in order to continue to use the ProSample, new ProPlates must be bought. It was anticipated that labora- tories would use two ProPlates per working day for every ProSample installed SOPHIE MANICART AND MIGUEL MEULEMAN tboth model 16 and 96), for a period of 22 working days in an average men stream would be the maintenance and service of the devices. It was exp ProPlate would be sold at 2 for model 16 and at e8 for model 96. A third that 30 per cent of the customers would pay 1,000 per device per ye maintenance All sales and services are payable within 30 days. Expected ProSample Sales, 2008-10 To further develop the devices and the disposables, and in order to deve Prosample 96, more R&D was needed. The monthly cost of R&D emplo initially amounts to 10,000, but is expected to increase to 640,000 from onwands, Other RADeelated costs are the disposables used in the labs, such lamps Bbres, electronics and biotech consumables, estimated at 478 month R&D-related subcontracting includes costs for disposable mode clean room-related jobs, and the design of electronics, mechanics and schw Based upon a detailed R&D project plan, the following monthly RAD tracting costs are forecast: 24.500 in 2007, E18,000 in 2008, E30,000 in 2 and 32,000 in 2010 Production of the devices would be outsourced. In order to be ready for the fint sales, a fixed production-related cost of E5,000 per month was foreseen October 2007 onwards, mainly related to quality assurance. This would drop 2.500 per month from August 2008 onwards, but increase again to 8.13 month from January 2010. A further fixed production cost of 1,000 per m for electricity, heating, maintenance and so on was foreseen from January 20 onwards Based upon a detailed bill of materials including direct materials, packagi labour and subcontracting, the variable production cost is estimated to 5,000 for a ProSample 16 and 7,000 for a ProSample 96 (including appropria margins for the manufacturer). The variable cost is 1 for a ProPlate 16 and a ProPlate 96. Finally, it is estimated that the cost of services (maintenance v amount to 50 per cent of the service revenues. The manufacturer will require both the devices and the disposables to le produced in batches. Disposables will be manufactured in batches of 5000 they have to be ordered (and paid for) one month before the disposables needed. Devices will be manufactured in batches of 100 and need to be onder three months in advance. The manufacturer requires payment when the placed, given that it is risky to work for a startup with uncertain prospects From January 2008, a sales manager will be hired costing 68,333 per month the first year, this salary will increase to 10,000 per month from January 3 onwards. A monthly sales budget of 5,000 is foreseen for development a maintenance of the website, folders, travel expenses, and so on. This w increase to 8,000 per month in 2010. General and administrative (G&A) expenses relate to the cost of admi tive employees (forecast from July 2008 onwards), costing 45,000 per year an PREPARING THE FINANCIAL PLAN: FORECASTING 213 CFO (from January 2010), costing e100,000 per year. Other administrative expenses are estimated at 17,000 per month in 2007, increasing by 7 per cent per year. These include office supplies, rental, cleaning, subscriptions to jour nals, telecom expenses, accounting and other professional services and sundries, but also the fee for the 'management support' provided by the CEO. Finally, the investment budget is as follows: E16,000 will be spent on R&D lab equipment in September 2007, 200,000 in 2008 (half in January, half in September), 150,000 in 2009 and 6210,000 in 2010 (the latter two amounti spread equally throughout the year). All lab equipment is linearly depreciatec over five years. There is a major investment relating to the mould for thi disposables, estimated at 200,000 for the disposable 16, due early 2008, anc 600,000 for the disposable 96, due early 2009. Moulds are depreciated ove three years. Other capital expenditures relate to PCs, printers, etc., and ar- expected to amount to 10,500 in September 2017, and 18,000 annually there after (spread equally throughout the year). These investments are depreciate over three years. All the above costs and investments will be paid in cash, as suppliers will be reluctant to extend trade credit to this startup company. Questions for Discussion Based upon the expectations described above, develop a financial plan the answers the following questions: 1. What is the average monthly burn rate, i.e. the negative EBITDA befo investments? 2. When will QualiPro reach EBITDA-break even? EBIT-break-even? 3. What is the total amount of cash that QualiPro will need to raise? What is t latest point in time that is this needed? 4. How much cash would you advise QualiPro to raise immediately? And lat 5. Which milestones will QualiPro be able to reach with the cash rai- initially? 6. What are the most crucial assumptions in the financial plan? 7. Based upon the insights provided by the financial plan, what changes wo you suggest to the current business model